But as the Brokerage Firm Struggles, the Markets Seem to Shrug

By GRETCHEN MORGENSON

Published: October 14, 2005

Even as the situation worsened yesterday at Refco Inc., bond and commodities markets seemed to shrug, with important indicators of market unease showing only slight increases over those of recent sessions.

While Refco said yesterday that the capital at both its brokerage subsidiary and futures operations was unaffected by its woes, the company said that Refco Capital Markets Ltd., which provides clearing services to offshore hedge funds, was experiencing a cash crisis and would not allow its customers to withdraw their money for 15 days.

''The liquidity within the company's nonregulated subsidiary Refco Capital Markets Ltd., which represents a material portion of the business of the company, is no longer sufficient to continue operations,'' the company said in a statement.

But while this may have seemed a serious setback for the company -- one of the largest players in commodities, derivatives and United States Treasury securities -- there was no stampede into government securities, where skittish investors almost always go to take refuge from market turmoil.

For example, the difference in the yields of Treasury securities maturing in two years and those coming due in 10 years -- known as the spread -- stood at 13 basis points last Thursday. Yesterday that spread had risen to 24 basis points. A basis point is one-hundredth of a percentage point.

Some traders said that the mild response to the Refco mess may have been partly a result of reduced transactions yesterday because of the Jewish holy day of Yom Kippur.

Still, traders in the fixed-income markets said that concerns about Refco's financial stability were evident behind the scenes. Trading activity was reduced, for example, at interdealer brokerage firms that match buyers and sellers of fixed-income securities and that clear their trades through Refco. One bond salesman said that customers who normally used these brokers to work their trades did their business elsewhere yesterday.

According to a list compiled by the Depository Trust and Clearing Corporation, a provider of settlement and clearance services for stocks, bonds and derivatives, some of the interdealer firms that Refco Securities clears for are Chapdelaine Corporate Securities & Company, Seaboard Securities and Rafferty Capital Markets.

Bond traders said that some firms in the United States Treasury market also began to cut back yesterday on their dealings with Refco, particularly in the business of making short-term loans or borrowings, known as repurchase agreements.

The Commodity Futures Trading Commission, which regulates futures commission merchants like the Refco L.L.C. unit of the company, said yesterday that it was closely monitoring developments at the firm. ''C.F.T.C. auditors and attorneys are presently in the process of reconfirming that Refco L.L.C.'s customer funds on deposit remain uncompromised and that the capital requirements of Refco L.L.C. are being met,'' the commission said in a statement.

The Chicago Mercantile Exchange, where Refco trades, said yesterday that Refco continued to meet its obligations but that the exchange had restricted it from withdrawing capital without the exchange's permission. Refco must also submit weekly capital computations to the exchange, which said it is monitoring the firm closely.

The exchange is a public company, and its stock fell 2.8 percent yesterday on three times its normal trading volume. Investors may be concerned that Refco's troubles will reduce trading volume and profitability at the exchange.

There are plenty of big potential losers from Refco's troubles, starting with institutions that hold its newly issued stock and bonds. Refco shares, which change hands on the New York Stock Exchange, did not open for trading there yesterday. The exchange said that the trading halt in Refco shares would continue while it ''evaluates the need for further disclosure and the continued listing of the company.'' The trading halt will continue until the evaluation is complete, the exchange said.

Refco's shares closed Wednesday at $10.85, but in off-exchange trading yesterday, Refco traded around $7.90. The stock, which made its debut in August at $22, traded as high as $30.55 in early September.

TIAA-CREF, the huge public pension fund, may be one of the biggest losers in the fall of Refco stock. According to regulatory filings, the fund bought 890,000 shares at around $28 each last month. General Motors Investment Management, which oversees employee benefit plans of G.M. and its subsidiaries, was also among the larger holders of Refco, according to its initial public offering statement. General Motors Investment Management's 1.3 percent stake in Refco stock made it the fifth-largest holder as of recent filings.

Bonds sold by Refco last February in a public offering that raised $600 million have also plummeted. The bonds, with a face value of $1,000 and an interest rate of 9 percent, closed at $400 each yesterday, rising a bit from earlier in the day, when they traded at around 34 cents on the dollar. Last Friday, the bonds were trading at $1,080 each, a premium to their issue price. At the bonds' recent price of $40, they yield 30.2 percent.

Many of these bonds found their way into high-yield bond mutual funds. For example, a July 31, 2005, tally of investments in the Goldman Sachs High Yield fund showed $7.25 million worth of the Refco bonds, or 1.9 percent of the offering. Goldman Sachs was one of the lead underwriters of Refco's stock in its initial public offering in August.